Understanding what type of returns are best for you and your goals

Generally, the default when it comes to investing in property or anything else for that matter, is income. That makes sense in a way because often the end goal is income, and it’s easy to think that the most important initial goal should be income. But if you’re looking to grow an asset base, income isn’t necessarily the most important type of return, or shouldn’t necessarily be the main focus.

For example, let’s say you’ve got £50,000 to invest. If you invest that £50,000 solely for income, and let’s say you get a 10% net yield which is pretty good, but it doesn’t grow in value at all. Well, that’s going to give you £5,000 a year. If your end goal is £50,000 a year, you’re going to have to save 10 lots of £50,000 using that strategy to get to where you want to be, which for most people is going to be unachievable or it’s going to take them a very long period of time.

On the other hand, if you take that same £50,000 and invest it into a £200,000 property with 75% leverage, and over a 10 to 15 year period later that £200,000 property doubles in value, which is around the UK average, and is then worth 400,000 pounds. Well all of a sudden your £50,000 is now £250,000. If you do that a few times, you’re going to be on a pretty decent track toward achieving your end income goal. The logic to that is just a fairly average 5% yield on a £1M asset base will give you £50,000 a year so based upon the above you’d need to do that four times to get there. It’s not going to make you a millionaire overnight but it will get you there more confidently then taking lots of risk and maybe losing the lot.

An analogy I often use for growing versus yielding an asset base, is growing an orange and squeezing an orange. If you’ve got a tiny little baby orange, you’re not going to get very much juice. If you’ve got a nice big juicy orange, you’ll get as much juice as you like. If the goal is to grow an asset base, growth is quite an important focus. You need to make sure you’re investing in properties that are going to achieve that, and then once you gave the asset base or are at least working toward it, you shift your strategy more so toward income as that is when it is achievable to get the income you want and need. This illustrates the importance of having a strategy in the first place and constantly revising it in line with your goals and your stage of wealth.